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How to calculate payments for untaken annual leave?

5 MIN READ

Annual leave is a right and an obligation for employees, but sometimes they prefer not to take them by choice, and for different reasons. What happens in such cases? How should the company respond? What options does the employee have? Are they able to calculate untaken annual leave in order to claim them? Are there any HR software platforms that help you to manage annual leave and absences? Read on, we’ll explain.

The fact is, the right to annual leave is included under UK employment law and the number of days to be taken is stated in each worker’s contract. The minimum is 30 calendar days per year, or rather, 2.5 days for every month worked. Nevertheless, the company’s collective agreement can improve this figure considerably.

Paid annual leave, however, is both a right and an obligation. This means that the employees must take all of their entitlement and cannot renounce nor exchange them for money. However, there are some exceptions where it will be necessary to know how to calculate an employee’s untaken annual leave to be able to compensate them.

 


 

What does the Working Time Regulations 1998 say?

 

The Employment Rights Act 1996 is the law that regulates employment labour law in the UK. More specifically, however, the Working Time Regulations 1998 deals with the particulars of annual leave. Some of the main characteristics relating to annual leave can be summarised as follows:

 

"1. The amount of annual leave will be agreed between the company and the employee/collective agreement, and economic compensation in exchange for holidays is prohibited by law. A full-time employee is entitled to the statutory minimum of 28 working days. The employer may include up to eight bank holidays within this total.

2. The dates of the annual leave to be taken will be agreed between companies and employees, according to the applicable provisions set out in the collective agreement regarding annual leave planning.

3. Each company will establish its own annual leave calendar. Whether it is the employee who is requesting, or the company that is enforcing, both parties are obliged to give at least two days’ notice for every day of leave proposed (where the leave period is one week, at least two weeks’ notice must be given.)"

In summary:

 

  • Annual leave is a legal right, and must all be taken by the end of the yearly period in question.
  • Full-time employees are entitled to a total of 5.6 weeks (28 days) a year amount of annual leave may be increased by some collective agreements (but never reduced).
  • Each employee accumulates 2.33 working days of annual leave per month worked.

 

What is a collective agreement?

 

We’ve already mentioned that collective agreements may increase employees’ amount of annual leave entitlement. It is therefore a legal provision that regulates working conditions in a particular geographical area or business sector. The main characteristic of a collective agreement is, that is drawn up between companies and employees.

It is a binding agreement on both sides and contracts should clearly state under which collective agreement the company is covered. Employees can therefore see their specific conditions and if, for example, they are entitled to more days’ holiday or not.

 

In which cases can an employee be paid in lieu of statutory holiday?

 

It is therefore clear that rest days cannot be exchanged for money and the employee is obliged to use them. Nevertheless, there are some very specific exceptions, as described below:

 

Termination of contract

 

Working relationships often come to an end, for whatever reason, whether due to the employee’s resignation or dismissal, disability, redundancy or retirement. If the employee hasn’t taken all of their corresponding annual leave entitlement, they must be paid in lieu for the outstanding holiday days. Financial compensation will be proportional to the amount of untaken leave and included in the final payment.

 

Temporary agency workers who have exceeded the 12-week qualifying period

 

Temporary agency workers acquire the same rights as directly recruited employees once they have completed 12 weeks in the same job. From then onwards, they are entitled to the same conditions including payment in lieu of untaken annual leave when they finish at the company.

 

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Formula for the calculation of untaken annual leave

 

In either of the above cases, the next step is to calculate payment for untaken annual leave and convert that into a financial amount.

You can work this out by using a simple formula: (A x B) - C

A = the total holiday entitlement for the year (5.6 weeks)
B = the proportion of the holiday year that has passed before the termination date.
C = the amount of holiday the employee has already taken

We can calculate untaken annual leave in this way. Let’s look at an example:

All workers in the UK are entitled to the statutory minimum of 5.6 weeks. An employee who works five days a week and receives and annual salary, leaves their job after six months having taken 10 days of holiday: 10 ÷ 5 = 2 (weeks). Our formula now looks like this:

5.6 X (6 ÷ 12) - 2 = 2.6 weeks to be paid in lieu

If the employee is paid on a monthly basis, then you can also calculate untaken annual leave in days.

For example, the employee working five days a week is entitled to the equivalent of 5.6 weeks (or 28 days). They leave their job after four months having taken three days off.

28 X (4 ÷ 12) - 3 = 6.24 days to be paid in lieu

To reach the financial payment corresponding to untaken annual leave, you then need to work out how much the employee earns per week or day, depending on which of the above cases apply:

 

Annual salary

 

Annual salary ÷ 52 (number of weeks in the year) = weekly pay
Weekly pay ÷ 5 (number working days in the week) = daily pay

As an example, let’s say the employee earns an annual salary of £22,000 (before tax) £22,000 ÷ 52 = £423.07 per week

£423 ÷ 5 = £84.62 per day

 

Monthly pay

 

Monthly pay X 12 = annual salary; Then just take the above answer to calculate their daily rate:

£1300.00 X 12 = 15,600 per year
£15,600 ÷ 52 = £300 per week
£300 ÷ 5 = £60 per day

The final amount to be paid in lieu to these annual and monthly paid employees, as per the examples above, are as follows:

 

  • Employee with annual salary receives £1099.80 
  • Employee with monthly salary receives £374.40

 

When can you pay an employee in lieu of annual leave?

 

Final pay is the amount the employee receives when the working relationship is terminated. This will include all pending pay and bonuses, including any untaken annual leave. Is it then, and only then, that the employee will receive corresponding financial payment.

 

OrgOS, your absence and leave management solution

 

Managing and calculating untaken annual leave is one of the primary tasks, yet one of the most tedious jobs carried out by a human resources department. Using a HR software platform such as OrgOS not only makes the process easier, but also saves you valuable work time.

Our software will enable you to easily manage each employee’s holidays and, if necessary, calculate their final payments in just one click. Simplify tasks, automate processes and make the best use of your time.

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